Question

Suppose for a hypothetical economy:
\( C = 100 + 0.75Y \) (where \( C \) = Consumption and \( Y \) = Income)
\( I_0 = 400 \) (\( I_0 \) = Autonomous Investment)
Value of Investment Multiplier (K) would be ------ . (Choose the correct alternative to fill in the blank)

• A. 5
• B. 4
• C. 6
• D. 3

Hint:

The investment multiplier measures how much total income increases when there is an increase in autonomous investment. It depends on the Marginal Propensity to Consume (MPC).

Answer 1

The Correct Option is B

Step 1: Understanding the Investment Multiplier formula. \[ K = \frac{1}{1 - MPC} \] Given \( MPC = 0.75 \), we substitute: \[ K = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4 \] Step 2: Conclusion. Thus, the correct answer is \( \mathbf{(B)} \).